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Illinois Appellate Court Delivers Another Blow to Relator in False Claims Act Litigation

On Monday, October 17, the Illinois Appellate Court issued another taxpayer-friendly opinion in an Illinois False Claims Act case alleging a failure to collect and remit sales tax on internet and catalog sales to customers in Illinois (People ex. rel. Beeler, Schad & Diamond, P.C. v. Relax the Back Corp., 2016 IL App. (1st) 151580)). The opinion, partially overturned a Circuit Court trial verdict in favor of the Relator, Beeler, Schad & Diamond, PC (currently named Stephen B. Diamond, PC).

Consistent with its opinion in State of Illinois ex rel. Schad, Diamond & Shedden, P.C. v. National Business Furniture, LLC, 2016 IL App (1st) 150526 (Aug. 1, 2016)), the Appellate Court emphasized the high standard of proof imposed on a whistleblower seeking to prove a reckless disregard of the tax laws. The opinion is noteworthy because the court repeatedly acknowledged that “what constitutes sufficient physical presence to justify collection of the use tax is far from clear.” 2016 IL App. (1st) 151580, ¶¶ 22, 24 (“Our supreme court in Brown’s Furniture, Inc. v. Wagner, 171 Ill. 2d 410 (1996) recognized that Quill did not make clear what constitutes a substantial nexus and that in looking at the evidence in these types of cases, reasonable minds can differ on whether sufficient physical presence has been established. Thus, the court found that the law in this area is open to interpretation depending on the facts of each case.”) The court concluded that if there is a lack of clarity in the law and the defendant conducts a good-faith investigation into its tax obligations and “its failure to collect the tax resulted from an honest misinterpretation of unsettled law or simple negligence, there is no liability under the False Claims Act.” Id. ¶ 34.

The court also repeatedly emphasized that proof of tax liability does not equate to a False Claims Act violation. See id. (“Although inquiry into whether a substantial nexus exists is helpful in making this determination, a finding of substantial nexus is not conclusive because a violation of the False Claims Act does not necessarily occur every time a substantial nexus is found and the defendants did not collect the tax. If the defendant conducts a good-faith investigation into its tax obligations, and its failure to collect the tax resulted from an honest misinterpretation of unsettled law or simple negligence, there is no liability under the False Claims Act.”)

Note: The opinion is another arrow in the quiver for defendants battling tax-related False Claims Act litigation claims in the Circuit Court of Cook County and elsewhere, particularly when the state has not moved to dismiss the litigation. As we have previously written, the Illinois Appellate Court has established a very favorable standard for consideration of state-filed motions to dismiss False Claims Act litigation. See our prior post on this subject here.

© 2019 McDermott Will & Emery

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About this Author

Catherine A. Battin, McDermott Will Emery Law Firm, Tax Attorney
Partner

Catherine A. Battin is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Chicago office. 

Cate has represented clients in state and local tax controversies at the audit, administrative and judicial levels in numerous jurisdictions.  She also assists her clients with various types of planning related to income and franchise taxes, sales and use taxes, and personal income taxes.  Cate has defended numerous internet sellers in cases brought under the Illinois False Claims Act alleging fraudulent failures to collect and remit use tax.

312-984-3233
Mary Kay McCalla Martire, McDermott, local tax disputes lawyer, Internal Audits Attorney
Partner

Mary Kay McCalla Martire focuses her practice on state and local tax disputes. She helps clients with audits, tax-related litigation, letter rulings and settlement conferences. Mary Kay has experience resolving disputes involving income, sales and use, utility and telecommunications taxes, as well as premium and retaliatory tax.

Mary Kay has an extensive litigation background in state and federal court, as well as administrative tribunals. She has particular experience in the defense of qui tam (whistleblower) claims filed in the state tax arena, and has won the dismissal of many Illinois False Claims Act cases. Mary Kay played a key role in most of the reported decisions issued by the Illinois appellate court in this area over the last decade. She also has experience defending clients against class action and consumer fraud claims.

312 984 2096
 McDermott Will Emery Law Firm, Lauren A. Ferrante, Tax Attorney
Associate

Lauren A. Ferrante is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. She focuses her practice on state and local taxation. Lauren represents taxpayers at all stages of state and local controversy disputes, at the audit, administrative, and judicial levels. She also assists taxpayers with planning, transactional, and compliance matters with respect to various state and local taxes, including income and franchise taxes, sales and use taxes, gross receipts taxes, and other miscellaneous taxes.

Lauren regularly speaks on state...

312-984-2053